8th annual new york value investing congress
October 2, 2012 • new york, ny Building an Investment Thesis
Bob Robotti, Robotti & Company Advisors •

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Join us for the 8th Annual Spring Value Investing Congress in Las Vegas!


Robert Robotti
President & CEO

The Firm is not providing investment advice through this material. This presentation is provided for informational purpose only as an illustration of the firm’s investment philosophy and shall not be considered investment advice or a recommendation or solicitation to buy or sell any securities discussed herein. As of the date of this presentation the firm continues to own the securities discussed herein. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Robotti & Company Advisors, LLC or its affiliates may engage in securities transactions that are inconsistent with this communication and may have long or short positions in such securities. The information and any opinions contained herein are as of the date of this material, and the firm does not undertake any obligation to update them. Information contained in this presentation has been obtained from sources which we believe to be reliable, but we do not make any representation as to its accuracy or its completeness and it should not be relied on as such. This material does not take into account individual client circumstances, objectives, or needs and is not intended as a recommendation to any person who is not a client of the firm. Securities, financial instruments, products or strategies mentioned in this material may not be suitable for all investors. Robotti & Company Advisors, LLC does not provide tax advice. Investors should seek tax advice based on their particular circumstances from an independent tax advisor. In reaching a determination as to the appropriateness of any proposed transaction or strategy, clients should undertake a thorough independent review of the legal, regulatory, credit, accounting and economic consequences of such transaction in relation to their particular circumstances and make their own independent decisions.

About Robotti & Company
History • Established in 1983 by Robert Robotti. • Our niche is small-to-mid capitalization equities of misunderstood, neglected, or out-of-favor companies. • Until 2004, our primary focus was on North American investments. • In 2005, Isaac Schwartz launched Robotti & Company’s international investing initiative, initially focusing on Asia. • Putting his “boots on the ground,” Isaac moved to Singapore in 2007. He currently resides in Hong Kong.


About Robotti & Company
Approach • The classic value investing tenets, as pioneered by Benjamin Graham, form the foundation of our investment approach. • We believe that market prices of securities do not necessarily indicate their true economic worth. • Guided by this philosophy, our analysts research and identify equities selling at significant discounts to their "intrinsic value” and have positively skewed risk-toreward ratios.

Three Investment Edges


• Superior/unique analysis of information leads to a different conclusion than the market.


• The ability to overcome inherent behavioral biases and make rational investment decisions. • Temperament, Process, Intestinal Fortitude.


• Superior information not readily understood by the market. • Multiple data points help to create a mosaic.


Two Edges Too Many ?
Professor Bruce Greenwald on Porter’s Five Forces – Four Forces Too Many “We agree with Porter’s view that five forces – Substitutes, Suppliers, Potential Entrants, Buyers, and Competitors within the Industry – can affect the competitive environment. But, unlike Porter and many of his followers, we do not think that those forces are of equal importance. One of them is clearly much more important than the others. It is so dominant that leaders seeking to develop and pursue winning strategies should begin by ignoring the others and focus only on it. That force is barriers to entry – the force that underlies Porter’s ‘Potential Entrants’.” Competition Demystified, Bruce Greenwald and Judd Kahn

• We believe that a similar concept applies to investment edges. • Analytical or informational edges can lead to superior investment results, but we believe that a behavioral edge – maintaining the proper temperament – is much more important in the context of long-term investment performance. It is also the most difficult edge to explain, teach, or learn.

Investment Edge Behavioral Edge
We take a longer-term view and have the ability to tolerate losing money before we make it.

Leads Us To

Analytical Edge
Within the context of a longer-term perspective and 30+ years of experience, we have the ability to develop a different conclusion than that of the market.

Informational Edge
Our network of industry relationships, focus on deep primary research, and experience serving on company boards, provides us with more pieces for building our information mosaic.


Idea Generation: What’s the Secret?
Special  Situations
•Rights offerings •Spin‐offs •Warrants •Recapitalizations


•52 Week lows •Low price to earnings  multiple •Laggards within an industry

Asset Plays

•Hidden assets •Undervalued on the balance  sheet

We search for stocks where the risk / reward asymmetry is greatest.
General  Reading /  Networking

Out of  Favor  Stocks /  Industries

•Busted IPO’s •Recent bankruptcies •Earnings misses •Hated in the headlines

•Constant reading •Sharing ideas with like‐minded  investors •Learn about companies as a  result of being on boards,  visiting companies, attending  trade shows, etc.


Secret #1: Ugly Ducklings
• Many value investors say they look for companies or industries that are beaten-up, out of favor, or out of fashion - ugly ducklings. • However, we find it most common for investors to avoid near-term uncertainty at all cost and only invest once the dust has settled. • Our ability to tolerate losing money before we make it allows us to concentrate on understanding the long-term normalized earning power of a business well before it turns into a swan.

Our Job as Contrarians
“…most people say, ‘We’re not going to try to catch a falling knife; it’s too dangerous.’ They usually add, ‘We’re going to wait until the dust settles and uncertainty is resolved.’ The one thing I’m sure of is that by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there’ll be no great bargains left… Thus a hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.” Howard Marks, Oaktree Capital

Ideas That Make Most People Cringe

• Mentioned Builders FirstSource (BLDR) in February 2011 interview with Columbia Business School’s Graham and Doddsville.  The stock was trading at $2.00 with an enterprise value of ~$250 million.  We suggested that normalized earning power, based on building ~1 mm homes in the U.S., was $100 - $200 mm of EBITDA or approximately $1.00 - $2.00 per share.  However, there was no end in sight to the housing crisis. • Mentioned BLDR again in August 2011 interview with Value Investor Insight when the stock traded at $2.09.  (BLDR closed at low of $1.03 in October 2011.)
**See disclosure on slide 52 for all stocks mentioned in both interviews**

General Reaction to BLDR idea in 2011


Investor Interest Rises as Uncertainty Falls
• While the housing market is certainly not out of the woods, headlines and rhetoric have changed tone. • We argue that the dust is just beginning to settle and people are just beginning to accept that the uncertainty will somehow be resolved. • Over the long-term, we still believe that Builders FirstSource is undervalued. • However, the argument that the stock is near-term fairly valued is more credible at the current valuation.
Source: CNBC.com

Builders FirstSource
2 Year Price Chart
Depending upon the  price paid in 2011, the  stock has returned  60%  ‐ 409%. 3,000 2,500 2,000 3.50 2.50 1.50 0.50 1,500 1,000 500 0

6.50 5.50 4.50

Source: Capital IQ


Secret #2: Identify Long Runways Z Industries facing significant shortterm headwinds / “unknowns.”
Individual companies that are certainly not immune to the industry-wide issues and may even have more serious complications. The dynamics are in place for very long runways of growth once headwinds dissipate.
Behavioral Edge: Patience and discipline are essential, since a catalyst may not be readily identifiable and the timeline generally unpredictable.


Calfrac Well Services, Ltd.
$23.95 (as of 9/27/12)

The following case study is presented strictly for informational purposes as an illustration of the investment process and approaches of Robotti & Company Advisors, LLC. This information should not be interpreted as a performance record or as an indication of future performance results.
(All figures from this point forward, except per share data, are in million Canadian Dollars unless otherwise noted.)

Calfrac Well Services, Ltd. (TSX:CFW)
• Canadian based independent provider of specialized oilfield services with operations in Canada, the United States, Russia, Mexico, Argentina, and Columbia. • Majority of revenue (92%) is generated by hydraulic well fracturing. • Other services include coiled tubing, cementing and other well stimulation services.
Data as of 09/27/2012

Price $23.95 Diluted Shares 44.7 Market Cap $1,067 Long-Term Debt 458 Non-Control Interest 0.4 Cash 167 Enterprise Value $1,362
Calfrac Price Chart (9/27/2012 to present)
$40 2,000 $35 1,500 $30 $25 $20 $15 1,000 500 0

Source: Capital IQ 16

Investment Highlights
 Canadian leader and #6 in the world – with ability to compete internationally.  Very long runway for growth of hydrocarbon production in both North America and also around the world.  Trend towards longer, more complex, multi-stage fractures.  Solid balance sheet and ample liquidity provides Calfrac with the ability to pursue opportunistic acquisitions.  High returns on capital, high inside ownership and 4.2% dividend yield.  Potential upside of 80% - 100% assuming a normal scenario where natural gas demand remains flat.  Potential upside of >100% assuming a scenario where increased global demand for natural gas provides a long runway for growth.

Industry Map: Oil & Gas
Exploration &  Production  (Upstream)
 Casing & Completion  Contract Drilling  Drilling Related Services & Equipment  Fluids, Pressure Pumping, Hydraulic Fracturing  Infrastructure Engineering / Design / Fabrication • Subsea / Surface Equipment • Compression  Lease Access  Seismic Data Acquisition & Processing

Transportation (Midstream)
 Consulting  Environment  Engineering  Safety  LNG Liquefaction

Refining &  Marketing  (Downstream)
 Asphalt  Gas to Market  Heating Oil  Jet Fuel

 NGL Extraction  Kerosene  Oil / Gas / NGL Storage Services  Pipeline Services  Processing  Transportation, Ship, Pipeline  LNG Regasification  Lubricants  Motor Fuel (gasoline / diesel)  Naphtha  Specialty / Commodity Chemicals


Services: Hydraulic Fracturing
• Leading provider of hydraulic fracturing services across all of North America, parts of Mexico, South America and Russia. • Revenue generated from hydraulic fracturing accounts for roughly 92% of global revenue. • The objective of hydraulic fracturing is to increase the amount of oil & natural gas extraction by increasing the conductivity of an oil or natural gas zone within a reservoir to the wellbore.
Opportunity: Increased demand and intensity of hydraulic fracturing in both North America and abroad should drive growth.

Services: Coiled Tubing and Cementing
• Coiled tubing accounts for ~6% of global revenue, while cementing accounts for ~2%. • Calfrac added 10 deep coiled units with the 2009 acquisition of Century. • The company currently has 30 coiled tubing units and 22 cementing crews worldwide.

Opportunity: Coiled tubing and cementing services allow for entry into new geographic areas with promising potential for increased hydraulic fracturing needs.


Calfrac Background
Calfrac Worldwide Capacity Region Canada United States Russia Latin America Total HP Capacity 2012 Year End  Projection 6/30/2012 302,000  456,000  45,000  27,000  830,000  990,000 

Calfrac was founded in 1999 by Ronald Mathison (Chairman), Doug Ramsay (CEO), Robbie Roberts and Gordon Dibb with 2 fracture fleets and one coiled tubing unit in Canada. Currently operates 35 fracturing spreads worldwide.

Source: Calfrac Presentation – Peters & Co. Limited 2012 Energy Conference

Revenue Mix
Revenue by Service Segment Hydraulic Fracturing Coiled Tubing Cementing 92% 6% Russia 2% Latin America 8% 4% Revenue by Geographic Segment Canada United States 49% 39%

Coiled  Tubing, 6%

Cementing, 2%

Russia,  8%

Latin  America,  4%

Hydraulic  Fracturing, 92%

United  States,  39%

Canada,  49%

Source: Calfrac SEDAR Filings


The Bear Case – A Falling Knife?
• Overcapacity of hydraulic fracturing equipment in North America continues for an extended period weighing on both revenue and margins. Flat rig counts support this belief. • There is no relief in sight for low natural gas prices. Prolonged low natural gas prices will curb the ramp up of demand in North America. • High returns on capital will attract competition – exasperated by relatively low barriers to entry. • As a result, Calfrac will face lower market share with lower margins and higher competition.

Our Variant View
• The current disparity in energy prices sets the backdrop for an industrial resurgence in North America. This is not a short-term phenomenon; it is a very long-term opportunity. • Energy intensive businesses will have a long-term economic advantage in North America. The size and scope of the resource will enable significant amounts of capital to be invested. • This will become a reinforcing opportunity as the acceleration of industrial development will require an increase in production of natural gas in North America. • While rig counts have been flat – meters drilled is increasing due to longer horizontal laterals. Total well depth, or ‘meterage’, has become a much more important indicator as a result of the increase in horizontal rigs. A greater number of fracturing stages and higher fracturing intensity along the laterals should lead to continued demand for pressure pumping even in a flat rig count environment.

Long-Term Opportunity Advances in Horizontal Drilling Technology Combined with Hydraulic Fracturing


Hydraulic Fracturing

Source: http://stateimpact.npr.org/texas/tag/fracking/


Projected Natural Gas Production

Source: U.S. Energy Information Administration 27

Projected Natural Gas Production

Source: U.S. Energy Information Administration 28

Long-Term Opportunity for Natural Gas Production
• The ability to extract natural gas from shale has turned the United States from a country with declining gas production to one with future growth. Over 90% of new oil and gas wells in North America now require the use of hydraulic fracturing.

The ability to recover hydrocarbons from low-permeability rock will increase the recoverable resource base in the continental U.S. by 86% to ~650 tcf from ~350 tcf.

Source: U.S. Energy Information Administration and Tudor Pickering Holt & Co.


North American Shale Gas Plays


Worldwide Supply: Conventional vs. Unconventional Sources

Source: Financial Times 4/23/2012


U.S. Oil Production: Same Technology
United States Became a Net Exporter of Petroleum-Based Refined Products for the First Time in 62 Years
U.S. Net Imports of Total Petroleum Products 
(Thousand Barrels per Day)


Thousand Barrels per Day








Data Source: EIA


North American Rigs: Horizontal Drilling
Vertical Drills (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Horizontal/Directional Drills (%)

Source: Baker Hughes Rig Count 33

Oil & Natural Gas Prices in the U.S.
$16 $160 $14

Natural Gas: Henry Hub Crude Oil: WTI (Right Axis)




Dollars Per Million BTU











Source: Dow Jones & Company/U.S. Department of Energy: Energy Information Administration/FRED

Dollars per Barrel




Energy Equivalent Price Differential
Differential Between Oil and Natural Gas
Energy Equivalent Price per Barrel of Oil
WTI Crude $160 Natural Gas Ratio 10.0x

Differential is now almost 6x
$140 $120

9.0x 8.0x 7.0x


6.0x 5.0x 4.0x 3.0x



$40 2.0x $20 1.0x 0.0x


Data Source: U.S. Energy Information Administration


Potential Sources of Demand
Natural Gas Replacing Coal Other Potential Sources of Demand

• • • •
(Source: Exxon Mobile Outlook for Energy: A View to 2040)

Refining Manufacturing Chemical Production Major IOC’s returning to the U.S.



Source: U.S. Energy Information Administration, based on U.S. Department of Energy (DOE), Office of Fossil Energy, Applications Received, and Federal Energy Regulatory Commission (FERC).


Increase in Lateral Length / Fracturing Stages

• Hydraulic fracturing costs make up 30% - 60% of the total well cost up from ~10% just 5 years ago.

Source: Calfrac Presentation – Peters & Co. Limited 2012 Energy Conference


Increase in Lateral Length / Fracturing Stages

Vertical Fracture

Horizontal Fracture
Source: http://stevemaley.files.wordpress.com/2012/06/marcellus‐xsection.jpg

Industry Landscape
North American Fracturing Equipment Fleet Canada Baker / BJ Calfrac Canyon GasFrac Haliburton Nabors Sanjel Schlumberger Trican Other Canadian Supply Estimate 2011 185,000 285,000 175,000 100,000 95,000 – 220,000 240,000 321,000 – 1,621,000 y/y change: 2011 1,400,000 271,000 150,000 242,000 364,000 1,416,550 50,000 30,000 2,000,000 733,000 631,000 140,000 150,000 149,500 600,000 160,000 1,800,000 429,750 570,000 650,000 1,073,000 13,009,800 y/y change: 14,630,800 y/y change: 2012E 200,000 400,000 225,000 100,000 145,000 40,000 250,000 265,000 414,000 30,000 2,069,000 27.6% 2012 1,550,000 277,000 200,000 306,000 447,000 1,473,250 50,000 208,300 2,250,000 765,000 660,000 365,000 300,000 229,500 683,000 260,000 2,000,000 659,000 670,000 1,000,000 1,386,700 15,739,750 21.0% 17,808,750 21.7%

United Staes Baker / BJ Basic Bayou C&J Calfrac FTS International GasFrac Green Field Haliburton Naboprs Patterson-UTI Performance Technologies Pioneer Platinum RPC Sanjel Schlumberger Superior Trican Weatherford Other U.S. Supply Estimate

Source: Weir / FT.com

North American Supply Estimate

Source: Peters & Co., Robotti & Company Estimates


Calfrac: Geographic Footprint
Calfrac has operations in the 4 largest pressure pumping markets: Canada
• Complex geology allows Calfrac to differentiate itself from the competition. • Centralized location of unconventional basins allows Calfrac to leverage relationships with operators.

United States
• Large unconventional resources would allow for a significant increase in production if/when U.S. natural gas prices rise.

• With a 5 year lag in technology, and easy oil slowly dissipating, there is potential for a significant increase of horizontal and multi-stage hydraulic fracturing jobs. • Calfrac has used its cementing business to make inroads into Russia

Latin America
• There are many unconventional plays spread across Latin America. • Calfrac’s deal with Pemex provided an entry into Latin America. • A recent cementing job in Columbia will also help increase their presence.

Calfrac: Why Canadian Pressure Pumpers?
• Investor bias against investing in companies outside of the United States creates the opportunity for even greater mispricing. • Canada’s complex and diverse geology, especially in the Western Canada Sedimentary Basin, give Canadian pressure pumpers a greater ability to differentiate themselves. • It is likely that Canada has a shorter timeline for the completion of LNG export terminals which will help increase demand. • Oil shale exploration is at an earlier stage than in the U.S. leading to higher growth potential. • Because the Canadian basins are more centrally located, service companies often gravitate towards expansion outside of North America. There are countries where not being an American based company could give Canadian counterparts an advantage.

Calfrac: Additional Investment Factors
High Quality Management – High Insider Ownership • Experienced, shareholder friendly management team led by CEO Doug Ramsay and Chairman Ron Mathison.  Ramsay has over 25 years of industry experience.  Mathison is a former investment banker.  Origins of company, formerly Denison Energy, indicate capital allocation / financial prowess.  Directors and Management own 26% of the company’s outstanding shares. Dividend • Calfrac pays a semi-annual dividend of $0.50 and has a current dividend yield of 4.2%.

Revenue and EBIT Growth
• Revenue CAGR of 30% from 2005 – 2011. • Canada and the U.S. have led growth. • Acquisitions, improved utilizations and pricing have driven growth. • Oil-focused activity becoming a larger portion of activity base. • Increase driven by changes in service intensity.
EBIT 900 800 700 600 500 400 300 200 100 0 62.452 81.31 107.8  63.0  30.8  200 13.1  0 325.4 

Calfrac Growth ($C mm)

Revenue 1,800 1,600 1,400 1,200 1,000 800 600 400



Source: Calfrac Presentation – Peters & Co. Limited 2012 Energy Conference 43

Earnings Summary
(Fiscal Year End 12/31) Total Revenue Gross Profit Gross Margin EBITDA EBITDA Margin Operating Income Operating Margin Cash Flow from Operations Capital Expenditures Free Cash Flow
Source: Calfrac SEDAR Filings 44

2010 935.9 167.6 17.9% 185.2 19.8% 107.8 11.5% 128.3 118.9 9.4

2011 1,537.4 402.5 26.2% 412.8 26.9% 325.4 21.2% 244.2 324.0 (79.8)

TTM 1,690.4 416.8 24.7% 420.1 24.9% 330.8 19.6% 292.6 345.4 (52.8)

Balance Sheet and Liquidity
(Fiscal Year End 12/31) Working Capital Total Assets Long-Term Debt Total Equity Total Cash Available Credit 2010 341.7 1,095.6 443.3 502.1 216.6 2011 398.5 1,405.1 451.0 700.8 133.1 TTM 357.1 1,478.7 451.5 748.0 166.6 247.4

• Calfrac has available liquidity of $414 million and does not have any long-term debt maturities until December 2020.
Source: Calfrac SEDAR Filings, Robotti & Company calculations 45

Return on Invested Capital
(Fiscal Year End 12/31) Net Working Capital Net Fixed Assets Invested Capital Operating Income Pre-Tax ROIC NOPAT After-Tax ROIC 2010 125.1 588.8 713.8 107.8 15.1% 70.1 9.8% 2011 265.4 825.5 1,090.9 325.4 29.8% 211.5 19.4% TTM 357.1 939.0 1,296.1 332.7 25.7% 216.2 16.7%


35% tax rate Source: Calfrac SEDAR Filings, Robotti & Company calculations


Risks to Our Thesis
• Drastic regulatory intervention. Primary Objections: Contamination of drinking water aquifers; N.I.M.B.Y.; Chemical handling / surface spills; Waste disposal

Photo credit: Adam Welz for CREDO Action.

Question: If hydraulic fracturing has been around for more than 50 years, why haven’t we heard much about it before? While hydraulic fracturing has been around for over 50 years, the volume, intensity, and complexity have all grown significantly over the past decade.

• Declining oil prices would negatively affect demand for Calfrac services.

Margin of Safety • Assuming there is no value on the technology, market position or goodwill, we project that a reasonable estimate of reproduction value is $23 - $24 per share • We believe that reproduction cost provides for a sufficient margin of safety when compared to the current market price of $23.95.


Year End December 31

2011 248 284 45 24 601

Normal Estimte 400 490 45 25 960 59.7% 2,358.0 53.4% 557.0 23.6% 35.5 130.0 127.2 264.3 44.7 $5.91 8.0x $47.30 $23.95 97.5%

Average Fleet (000s HHP) Canada U.S. Russia Latin America Total y/y change Revenue y/y change EBITDA margin Interest D&A Taxes Normalized Net Income Shares EPS P/E Multiple EPV Estimate Current Share Price Upside
Source: Company Financials, Robotti & Company estimates


412.8 26.9% 35.5 87.5 88.579 201.2

Disclosure: Ownership Information
Disclosures Robert Robotti and/or members of his household have a financial interest in the following securities Robotti or its affiliates beneficially own common equity of the following securities Robotti or its affiliates beneficially own 1% or more of any class of common equity of the following securities Robert Robotti serves as a Director or Officer or Advisory Board Member of the following securities Calfrac Well Builders Services FirstSource (TSX:CFW) (NASD:BLDR) Yes Yes







As of the date of this presentation, Robotti & Company Advisors, LLC and/or its affiliates owns shares of Calfrac Well Services, Ltd. and Builders FirstSource and does not have any current intention to exit the position. Companies have been chosen solely as a case study to illustrate the investment process and approach of Robotti & Company Advisors, LLC. This information should not be interpreted as a performance record or as an indication of future performance results.

Disclosure to Slide 11
Below are all of the stocks mentioned in the February 2011 interview  with Graham and Doddsville and the August 2011 interview with Value  Investor Insight.
Graham and Doddsville Interview Builders First Source Subsea 7 NewMarket Value Investor Insight Interview Cavco Sawada Holdings  Panin Insurance  KazMuniGas  Enerflex Panhandle Builders First Source Pricesmart (Prices from CapitalIQ) Ticker BLDR OB:SUBC NEU Ticker CVCO JASDAQ:8699 JKSE:PNIN LSE:KMG TSX:EFX PHX BLDR PSMT 2/4/2011 $2.22  $142.10  $130.45  8/31/2011 $36.37  $746.00  $560.00  $16.95  $10.70  $28.39 $1.93  $65.46  9/27/2012 $5.25  $132.80  $244.08  9/27/2012 $46.03  $320.00  $495.00  $18.10  $12.60  $31.24 $5.25  $76.29  % Change 136.3%  (6.5%) 87.1%  % Change 26.6%  (57.1%) (11.6%) 6.8%  17.8%  10.0% 171.8%  16.5% 


Robotti & Company Advisors, LLC
6 East 43rd Street 23rd Floor New York, NY 10017

Phone: (888) 762 - 6884 info@robotti.com www.robotti.com

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